The good news is that people are living longer, but that’s also the bad news, industry analyst Colin Devine told participants at last week’s LIMRA conference.
With less than 8% of U.S. workers still covered by defined benefit pension plans, living too long has become as much of a risk as dying too soon, said Devine, managing director of life insurance equity research for Smith Barney, a unit of Citigroup Inc., New York.
Variable annuity living benefits may present a solution for many facing that risk, and have become the “marquee product” for the huge market of 50-to-59-year-olds, he said.
Yet they also represent a significant underwriting risk for carriers, he warned.
Poor yields on new money, slim credit spreads and crediting rate guarantees are straining insurer’s earnings. In addition, industry consolidation will shrink the number of insurers, Devine forecasts.
VA guaranteed living benefits have caused rating agencies, regulators and analysts to worry about whether VAs have been adequately priced, he added.
Devine said he was uncertain about the efficacy of capital requirements imposed by regulators. The C3-Phase II capital testing model adopted by the NAIC might actually create more volatility than earlier capital standards because it focuses on the worst 10% of companies in terms of capital ratios, he said.
Carriers’ risk management may also not be keeping up with aggressive new product features, such as the “five for life” VA, which he called the “hot new product” for 2006.
Five-for-life products, often with spousal options, offer 5% return as annual income for the owner’s life.
He predicted that another product, the equity-indexed annuity, may be in for major regulator-imposed changes in sales practices, compliance requirements and commissions paid.
He called EIAs the “wild west of sales” for the industry because of their scrutiny from regulators and the fact that they primarily are marketed by small companies.
“You don’t need to waste your time on stuff like this,” he admonished his audience.
In an interview, Devine charged that EIAs had the “worst sales practices in terms of suitability” and that the industry will ultimately need to clamp down on those practices. He said he regretted that the National Association of Securities Dealers, Washington, withdrew its recent proposal that EIAs be sold only by registered security dealers.
“I would have preferred the NASD to require registration,” he said.
Devine also was cool to the prospects for long term care insurance. He called it a product that is “going nowhere fast,” as major carriers will ultimately fail to get the returns they seek on the product.
“They can’t seem to make money,” he said. “Long term care is too much like health insurance–regulators won’t allow big rate hikes.”
He also pointed to consumer resistance to the product.
“If a policy costs a 40-year-old $2,000, why not put off buying one?” he asked. “Where is he going to get the money?”
He said, however, that group LTC might ultimately take off due to its lower costs. He noted, too, that under legislation passed this year and starting in 2010, VAs with LTC riders will carry no tax penalty on any LTC benefits paid to policy owners.
LTC insurance premiums and benefits will also eventually become fully tax deductible, he predicted.
He also forecast that the Pension Protection Act–the same legislation that eased the tax rules on LTC riders–will benefit the VA industry considerably.
The growth of 401k plan contributions due to the PPA’s provision that employers automatically enroll in their 401k plans will ultimately benefit VA sales when boomers retire, he said.
“Eventually, automatic enrollment is going to be mandatory,” he maintained.